IRIDEX Corporation
Q2 2014 Earnings Call Transcript

Published: 2 Aug 2014

[Operator:]

Greetings, and welcome to the Second Quarter 2014 Earnings Call. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to you host Will Moore. Thank you Will, you may now begin.

[William M. Moore:]

Thank you, operator. Good afternoon and thank you for joining us to discuss the results of second quarter of 2014. My name is Will Moore, and I am the CEO of IRIDEX. I am joined today by Jim Mackaness, our CFO and COO. Jim and I will be delivering some prepared remarks related to the quarter and to the business and then we will open the floor for questions. Before we get started, Susan Bruce will read the required Safe Harbor statement. Susan?

[Susan Bruce:]

This conference call will contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Act of 1934 as amended relating to global and domestic market conditions; demand for the company’s products and market acceptance of the company’s new products such as MicroPulse enabled laser devices, trends in the global healthcare marketplace with respect to the treatment of eye diseases, such as diabetic macular edema and glaucoma, development of new products and new applications for existing products, the company’s growth strategy and growth opportunities, including acquisitions, technology investments and strategic relationship, pricing of the company’s products, the company’s operating expense controls and programs relating to such control, the company’s share repurchase programs, anticipated new product releases and the company’s financial outlook and performance in the remainder of fiscal 2014 and future periods. These statements are not guarantees of future performance and actual results may differ materially from those described in these forward-looking statements as a result of a number of factors. Please see a detailed description of these and other risks contained in our Annual Report on Form 10-K for the fiscal year ended December 28, 2013, filed with the Securities and Exchange Commission. Forward-looking statements contained in this conference call are made as of this date and will not be updated. I will now turn it back over to Will.

[William M. Moore:]

Thank you, Susan. The second quarter and first half of 2014 again showed strong commercial progress as we achieved our ongoing goal of double-digit revenue growth in both periods over the prior year. We generated $10.6 million revenues up more than 15% from the second quarter of 2013. We continue to see growing demand for our core products both in the U.S. and internationally as value-based alternative to the current regiment of drug therapy. Looking at the geographic mix, IRIDEX had a very strong system sales in the U.S. which was more than offset a weaker international result that include no major tender awards during the second quarter and some disruptions in South America as the World Cup activities caused a pause in our robust Brazilian products mode. We also continued to see some level of disruptions in the Middle East due to geopolitical issues. MicroPulse a proprietary tissue-sparing laser technology is undoubtedly now becoming an established part of the landscape. Such positions are gaining confidence using it as the first line treatment for a variety of Ophthalmology disorders, both retinal and in the front of the eye. Domestic system sales were particularly strong in the second quarter led by ramping sales of both TxCells and laser system with MircoPulse. We have now been talking about MicroPulse several years as a commercial platform and having discussions about when and how a tipping point might come about. The responses have always indicated that well I couldn’t predict when it would come, I thought that it was close. I am not still sure what a tipping point looks like but I feel very good about a quarter in which we grew our revenues by more than 80% in domestic system sales. Tipping points are not as adoption grows and more physicians are exploring the various uses of MicroPulse tissue-sparing laser energy, we are gaining confidence that our strategy and product platform is the vast glaucoma market warrants additional investment. First, let's talk about on the retina market. Globally, physicians, healthcare systems and peers are today struggling with the impact of aging populations and dramatic growth of diabetes. Diabetes and a debilitating visual effects of diabetic retinopathy are reaching epidemic levels, especially in countries where western diet and lifestyle are relatively new phenomena and obesity is a chronic problems. Up to 30% of all diabetics will develop some form of diabetic retinopathy during the lifetime. As we have stated, evidence in the case, the current approach of treating this condition, expensive drug treatment via injections of 6 to 8 weeks is unsustainable. The cost is prohibited and logistics impossible for literally millions of patients seeking treatment in both the developed world and the developing world. Clearly, the requirements of value based medicine in this area is resonating around the world. MicroPulse with its single treatment efficacy and positive outcomes represents a more efficient and a more cost effective alternative. In addition, the safety profile established in retina is also leading to additional opportunity in the marketplace including glaucoma. As new technology such as MicroPulse have proven to be safe, physicians tend to be getting exploring new uses building on the work of their peers and looking to do clinical areas where they foresee a benefit. This is exactly what is happening with MicroPulse each month we get word about or contacted by top ophthalmologist looking to do work in a range of conditions from DME to glaucoma. While we need to be cautious about maintaining robust regulatory controls over how we support this request and activity, we see this phenomena as very positive and just one more data point showing progress and opportunity. Now a few words about glaucoma

[James H. Mackaness:]

Thanks Will. As we noted in our press release and in Will’s comments, our revenues for Q2 2014 reached $10.6 million, up 15% from Q2 2013 revenues. In addition, we saw sequential growth of approximately 2.5% over Q1 of this year. The business continues to display an underlying strength in both domestic and overseas market and across systems and consumers. Overall system sales in Q2 2014 were $5.8 million up 34% from $4.3 million in Q2 2013 with a year-over-year increase both domestically and internationally. On a sequential basis, system sales were up more than 5% from the $5.5 million reported in Q1 2014. Domestic system sales rebounded strongly from a slow start of the year capitalizing on the momentum established early in the spring. International system sales continued to be very strong throughout the second quarter. We continue to see sales of our MicroPulse enabled IQ products become a larger portion of our product sales and sales of our TxCell delivery device outstripped our ability to supply. Recurring revenues were $4.8 million in Q2 2014 consistent with recurring revenues of $4.8 million in Q2 2013 and $4.8 million in Q1 2014. Overall, gross margins in 2014 second quarter continued to move in the right direction and we achieved as stated near term goal of 50% as compared to 48.9% in Q1 and 48.7% margin in the last year's second quarter. We view the continued increase to be a positive result particularly as gross margins continued to be impacted by our strong system sales especially via international distributors where margins are somewhat more constraint. Our long term goal is our product mix including a higher percentage of consumable products and Will gave a flavor of the anticipated consumable products to come in his opening remarks, which re-balancing towards consumable and increased production efficiencies associated with revenue growth, a part of our plan to achieve our longer-term target of $0.55 or better. Operating expenses for Q2 2014 were $4.9 million, up from $4.0 million in Q2 2013 that growth reflects the variety of investments both commercial and product development and to both near and long-term strategies to continue growing our market share and opportunities in both retina and glaucoma market. Specifically, as we noted in the last quarter R&D expenses have increased due to our commencement of various program. Will mentioned the cost of the new glaucoma programs affecting R&D and one additional program has also had a notable impact. The cost reduction program for the IQ platform is fully underway with (inaudible). We spent about $350,000 on the program to-date and anticipate that we’ll invest approximately $250,000 more between now and the year end. The goal was to reduce $200,000 of cost per unit from the product platform and that is on track based on today's volumes as we generate approximately $0.5 million in additional gross profit annually. The benefit from this program are expected to be come online in the beginning of next year. On the glaucoma front we are working hard to have this ready for limited commercial launch by the endoprobe this year. Although, we recognize there maybe some concerns over our increased expenditures, we believe these investments to be prudent because they are bounded and the potential returns are significant in near term. I am giving a bit more detail this quarter on R&D cost because I want to make sure that everyone understands that this progress will provide near term leverage on margins in the bottom line in the case of the cost reduction program and both from the top line and gross margin in the case of the glaucoma program. In addition, R&D cost included the necessary efforts and expenses to ensure our products are rose compliant which is European directive that became effective from July 22 and our G&A cost included the necessary efforts and expenses to ensure we were able to make our conflicts declarations as mandated by Congress. With all of that factored in, operating income for Q2 2014 was $0.4 million compared with operating income of $0.5 million for Q2 2013. Net income was $0.3 million or $0.03 per diluted share for the second quarter of 2014 compared to net income in last year second quarter $0.4 million or $0.04 per diluted share. Looking ahead to the third quarter of 2014, we are projecting revenues between $10.0 million to $10.3 million representing growth of 5% to 8% over the last year's third quarter. Gross margin is anticipated to come in between 48% to 50% and operating expenses are expected to be between $4.6 million to $4.8 million. During the quarter we purchased 220,000 shares with an average price of $8.62 per share, subsequent to the quarter end we continued buying shares and have exhausted the share repurchase program established by the board of directors in February 2013. In total we repurchased 377,000 shares under that program for an average price of $7.97. Today the board established a new share repurchase program allowing the purchase about to $3 million worth as the company’s common stock over the next 12 months. And with that I will turn the call back over to Will.

[William M. Moore:]

Thank you, Jim. To summarize my earlier remarks, we believe we are positioned to take advantage of the current macro and demographic trends in the global healthcare marketplace. We are pleased with the results but we’d like to remind folks that we’re still a small company with significant upside, but significant exposure to international system sale cycle. The impact of those factors will continue to create lumpiness in our revenue line, but also accentuate the importance for our growing recurring sales opportunities in glaucoma and other new clinical areas. We have a unique disruptive technology in MicroPulse that is clinically proving itself on a daily basis as a safe and effective treatment for very large and rapidly growing healthcare issues in ophthalmology today. Diabetes and DME now is enormous global issue and for glaucoma which is becoming significant global issues given the fast growing post 65 years demographic. We will invest in our future when it makes financial economic sense such as the cost reduction program with the finite cost and time of structure to enable us to prove margins. We will invest in product developments especially in M&A assets or expenses and a share buyback program, we believe our stock is undervalued. We have created a kind of company that can address these exciting opportunities that’s been our goal since I became CEO and I believe we have made huge strides in our ability to be successful in these efforts. Before I turn the call over to the operator for questions, I would like to let you know that we will be participating in the Wedbush Life Sciences Management Access Conference in New York City on August 12 as well as the Robert W. Baird Healthcare conference in New York City on September 3 and 4. For those of you unable to attend we encourage you to listen to the webcast presentation which will be available through the investor relations section on our website. I want to thank our employees and the distribution partners around the world for the hard work. With that I will turn the call over for questions and please one question with a follow-up question and then re-queue. Operator?

[Operator:]

(Operator Instructions) And our first question comes from the line of Larry Haimovitch with HMTC.

[Larry Haimovitch:]

Good afternoon Jim and Will, congrats on a nice quarter.

[Larry Haimovitch:]

Thank you, Larry.

[Larry Haimovitch:]

So, I have a few questions for either of you, perhaps Will more than Jim. I recently watched a video that was sourced on your website from a doctor in Washington DC from DC retina. And he was talking about his very happy results and success with MicroPulse for diabetic macular edema, but he also made some reference to the fact that he thought he had some applications for macular degeneration and Will your prepared remarks talked about growing uses and I wonder if you could comment on that. It was quite intrigue with that idea because macular degeneration would represent another huge opportunity for IRIDEX if you were to make any headway there?

[William M. Moore:]

Okay. So Dr. Adams at DC retina that was the newscast in Washington DC that went on maybe six weeks ago, I think. And I think that's the perfect example of what I had in my prepared remarks that when medical technologies or devices are really proved to be safe and there is disease states that are similar, doctors are going to tend to try to explore or try something new. And I think that's what he is saying, as I have used this on my DME patients, but I think it has application in his comment is it does. At this stage we have heard from a couple of other doctors that have done similar things, but we are remaining highly focused on retina and beginning to open the aperture in glaucoma because that's the same type of thing we are hearing about MicroPulse in glaucoma. And we will let that percolate along a little while and see how the other doctors come up with the answers, but I think that the disease is similar enough that there is probably some use for MicroPulse in that area, but we will get to it – we will continue to explore and look at it overtime.

[Larry Haimovitch:]

Great, okay. Second question for either of you, your guidance for Q3 is conservative, we all understand that it's better to under promise over delivery, but 5% to 8%would strike me as being quite conservative and do you see something in the trends of the business at this point after a month and makes the concern or is it just the fact that you do have as you said many times in this call it's a lumpy business, there are geopolitical risks etcetera, etcetera and that just make you want to guide more conservatively?

[James H. Mackaness:]

I will take first Larry, it's Jim here. I think your point the challenge we face on the guidance side for Q3, the vacations season on the global basis in the month of August and the month of August is ahead of us right now when we are talking so we had to be a little bit cautious about what that means and whether as we would typically expect a little bit of slowdown in August and how much do we ramp up in September. So, you are saying conservative I think we’d sort of say you know we think that's a realistic band that we are aiming for and just trying to factor on how August plays into our business.

[Larry Haimovitch:]

Okay. I have got a couple of other questions. Let me jump back in the queue and let a couple of people go and then I will come back in.

[William M. Moore:]

Thank you.

[Operator:]

Thank you. (Operator Instruction) And the next question comes from the line of Joe Munda with Sidoti & Company. Please proceed.

[Joe Munda:]

Good afternoon, guys. Thanks for taking the questions.

[William M. Moore:]

Hi Joe.

[Joe Munda:]

Real quick, the growth that were in the quarter can you give us a breakout of what was first unique growth versus price increases?

[William M. Moore:]

Well, we don't get into that level of detail but I would say to trying to give some color. There was definitely a unique growth for one, the other element that I think is the system ASP went up and by that I mean that we will be selling laser consoles and with the introduction of TxCell as a delivery device, we now have a situation where we have laser console and TxCell being sold which has taken the overall system price up and then the third component within it is we have been and we do continue to look at the pricing at the MicroPulse as a full value add-on option and we continue to basically get a increasing ASP on that. So it's combination of all three.

[Joe Munda:]

Okay. But I am just trying to get a sense of where the bulk of the growth occurred is it more – it is skewed more on the price side or was it more skewed on the unit growth side? And the only reason I am asking is because following with Larry's question on the guidance for the third quarter, I am trying to get a sense of disconnect even though you said that August is vacation month, last year this time you put up 21% growth. So, I am just trying to get a sense of what’s going on?

[William M. Moore:]

We understood, I mean obviously the issue you said 21% last year now we have to grow above that rate this year so we have the compounding challenge going through August. I mean, I would just sort of say, it's been a combination of increased units and increased the system ASP would be the two drivers.

[Joe Munda:]

I will hop back in the queue.

[Operator:]

Thank you. (Operator Instructions) And the next question comes from the line of Larry Haimovitch with HMTC. Please proceed.

[Larry Haimovitch:]

Thanks. Two more questions. One Jim, you reference the disposable revenue and it looks like you have had a couple flat quarters in row. I am kind of surprised given that system sales are so strong that the disposals aren’t picking up a little bit more momentum is there anything going on in the disposal business, would you shed a little bit of light on that?

[James H. Mackaness:]

Well, I do think to your point on the system sales you should remember that the penetration and the focus of MicroPulse enabled systems and particularly MicroPulse system enabled system with TxCell would be clinic, sorry in the office side of the equation. So, from our perspective it's not necessary or surprising that the success of those system sale has not led to an increase in endoprobe consumption. So, the stability in the endoprobe continues waive surgical site and growth in the office.

[Larry Haimovitch:]

When are you going to be launching a couple of new products the Scrapper and there was a couple of other new disposable products which I thought look quite promising. Have they been into the market yet or that's still coming later this year Jim?

[James H. Mackaness:]

The Scrapper has really gone in. I think the one that where we would like to see because it's fair amount of excitement from the sales channel is that product we are actually putting in August in a limited release which is the extended reach, endoprobe and we know from a number of customers site that the adjustable intuitive probe that we have is somewhat criticized because it doesn’t have the reach that the customer, the doctor would really like. So, I know there is quite a lot of enthusiasm in the channel to really get the hands on the, we call it ANI AXA which has literally being put into there and in August.

[Larry Haimovitch:]

Okay and then one more follow-up question Jim. On the buyback the additional $3 million buyback, is that a 10b51 or is that which means you just buy of course regular intervals or is that more opportunistic, more normal buyback, but more limited by the fact of how much trading volume there is etcetera, etcetera?

[James H. Mackaness:]

From the board approval perspective, it was basically to allow the $3 million to be invested. The decision of whether we do it under 10b5 is in front of us. We typically have used that mechanism, but we have to make that decision coming up in the open window.

[Larry Haimovitch:]

Okay and when does your windows open two days after today?

[James H. Mackaness:]

Tuesday.

[Larry Haimovitch:]

Tuesday okay.

[William M. Moore:]

And Larry whether -- I think this is great, whether you’re on 10b51 or just a regular purchase, we are still restricted by the number of share buyback by the trading volume on an average weekly basis.

[Larry Haimovitch:]

I guess the advantage of 10B51 is, you don’t get restricted with core insight information or significant information in trading and you wouldn't get closed up for example I guess in September for the last 30 days or 15 days in the month when typically insiders can buy or sell?

[James H. Mackaness:]

And that, yes that's correct that’s why historically we may have made use of that because to Will's point about, with the volume restriction and if we were only to do our activities during the open window it would be a fairly restricted program. So, we have made advantage of the 10B5 in the past.

[Larry Haimovitch:]

And that would seem to make the more sense again, wouldn't it Jim?

[James H. Mackaness:]

Yes.

[Larry Haimovitch:]

Okay. Great. One plus one equals two. Right. Thanks guys.

[Operator:]

Thank you. We will now like turn the call over to speakers on line to proceed with any closing comments.

[William M. Moore:]

Alright. I would like to thank you for attending today's conference and we look forward to providing additional information as we go forward around the glaucoma initiatives and hopefully we will see you at the AEO and on the next conference call. Thank you.

[Operator:]

This concludes today's teleconference. We thank you all for your participation and you all have a great day.